Five reflections on the UK’s productivity problem, and how to tackle it

The UK’s productivity shortfall compared with that of other developed countries – a gap estimated to be as much as 20 to 30 per cent – has long been an economic sore point. Countless politicians and commentators have grappled with this problem and its implications for living standards in recent years. But how exactly does it play out across the country’s regional divides? And what policy issues arise from it, particularly in the light of the Government’s Industrial Strategy, which expressly aims to boost productivity?

You can listen to the podcast here – but as a taster, here are the key issues covered by the discussion:

Not all businesses can be as productive as each other

The idea that the UK has an unusually long tail of productivity laggards that pull down the national average – otherwise known as the ‘long tail’ – has preoccupied policymakers in recent years, including Andy Haldane at the Bank of England. Their belief is that by making those long tail businesses more productive, the problem can be solved.

However, as Paul points out, what this fails to reflect is that the long tail is dominated by local services businesses, which have a limited scope for making productivity improvements due to the types of activities they involve (such as hairdressing). The key to raising national productivity should instead be to focus on exporting businesses, which are better equipped to absorb innovations and find new markets.

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But the potential for productivity growth in the local services sector shouldn’t be dismissed

As Dave stresses, the local services sector cannot solely be characterized by hair salons, cafés and gyms – it also includes some of the UK’s biggest retailers, hotel chains and care providers, as well as large-scale support services like cleaning and security. Recent research has shown that productivity can be improved to some extent in this sector, and the sheer size of some local service firms means that any productivity gains they make could make a significant difference to the economy.

Productivity plays out differently across UK geographies

The discussion around productivity and the long tail has largely taken place at a national level, but, as Paul highlights, the problem looks very different across the UK, with far starker regional divides than in most other developed countries. The Greater South East of England, particularly its cities, is not only the most productive part of the UK economy but also one of the most productive parts of Europe as a whole. This is down to the region having a much greater share of high-productivity exporting firms and a far lower share of low-productivity exporting firms than other places.

By contrast, the distribution of productivity in local service businesses varies very little across the UK. A hairdresser in Plymouth is as productive as a hairdresser in Blackburn, for example. Instead, the significant variations in productivity variation seen across the country can be attributed to the performance of the export base in different cities.

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High productivity doesn’t necessarily translate into an economy that works for all

Paul makes the troubling observation that, despite London’s high-performing export sector and higher wages, the capital has some of the highest poverty levels of any place in the country. This paradox can be explained by the fact that higher wages coupled with a housing shortage have increased house prices in the city. As a result, the real wage a London worker is left with once they’ve paid their rent is relatively lower than it might be if they were based elsewhere.

The productivity puzzle has big social implications, including the rise of in-work poverty

Twenty or thirty years ago, poverty was associated with worklessness. Nowadays, as Dave highlights, more than half of people living in poverty are in working households simply because the income they’re earning isn’t sufficient to meet their needs. This illustrates the serious impact that poor productivity has on quality of life for people across the country – and the imperative of addressing these issues.

As our podcast discussion suggests, it’s possible that without policy action, the productivity divide between the exporters and the local services in the UK will widen even further in the future. This would result in ever-greater wage growth at the exporting high end, but more wage stagnation at the local services low end. The challenge for policy is to, therefore, increase productivity while also ensuring that as many people as possible can benefit.

Our podcast panel explores these policy implications in detail – listen to the full discussion below.

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